Atlas Air will have eight new, more fuel-efficient Boeing 747-Bs in service by year end, which will trim maintenance costs while generating more revenue.
Atlas Air

At a recent price near $42, Atlas remains woefully undervalued, trading at about eight times 2014 earnings estimates, compared with its historic range of 12 to 15 times forward earnings. As a result, some investors and analysts think last week's gains were just the start of a long-term climb that could boost the stock nearly 50%, to $60.

Formed in 1993, Atlas Air Worldwide is the parent of Atlas Air and Titan Aviation Leasing. It's also majority owner of Polar Air Cargo, which is 49% owned by DHL Express, its biggest customer. Atlas' main business is leasing its planes and crews to big air-cargo services, including British Airways World Cargo, Qantas Freight, and Emirates SkyCargo, for long-haul flights from Asia to the U.S. and Europe, as well as between the Middle East and the U.S. It also provides crews, maintenance, and insurance to customers who have their own planes. Another service of the company is carrying military cargo and providing passenger and commercial charters.

The military-cargo and commercial-charter portions of the business have been the biggest worries to investors. The U.S. is gradually winding down its presence in Afghanistan. First-quarter results showed a sharp drop in military-cargo volume, though military-passenger service grew strongly. Overall, Atlas revenue rose 5%, to $377 million, but fell short of Wall Street's $391 million expectation because of continued softness in the commercial-charter segment, in which planes are booked on a short-term, "as needed" basis. Atlas last week cut its forecast for this business, a reflection of the soft global economy. The Purchase, N.Y., company's core business of leasing planes and crews, and providing maintenance and insurance remains solid.

ATLAS HAS ATTAINED an important competitive advantage with its fuel-efficient Boeing freighters, which hold bigger payloads and command premium rates. Atlas estimates that each new 747-8 freighter adds about four cents a month to earnings. By year end, Atlas will have nine 747-8s—it already has eight in service—in its total fleet, which currently includes 53 planes. Last year, it had four 747-8s by Dec. 31.

Look for margins to widen, too, as the heavy maintenance costs associated with an aging fleet are reduced in the early years of this new fleet. Reduced capital spending on the new fleet will also help.

Atlas Air

Recent Price

$41.64

52-Week Change

-20%

Market Val (bil)

$1.1

Revenue (bil) 2013E

$1.8

Net Income (mil) 2013E

$127

EPS 2013E

$4.88

EPS 2014E

$5.49

P/E 2014E

7.6

E=Estimate. Sources: Thomson Reuters

Another plus: Atlas has a long-term contract with Boeing to operate what's known as the Dreamlifter service that picks up and delivers outsourced parts from around the world for production of the new 787 Dreamliner aircraft in Charleston, S.C., and Everett, Wash. Despite the Dreamliner's grounding because of battery-safety issues ("Will Boeing's Battery Fix Fly?" Barron's, April 29), airlines want it for long-haul flights because of its fuel economy, lighter weight, and comforts such as special air conditioning that reduces the effects of jet lag.

The grounding, recently lifted by the Federal Aviation Administration, didn't affect Dreamliner production, which Boeing this year ramped up to five planes a month from two. That number is expected to increase to seven a month. Boeing already has 800 orders.

Many shareholders bailed out of Atlas last November when both revenue and earnings came up short of expectations. Despite a strong fourth quarter that topped forecasts, investors have driven the shares to punishingly low levels on concern about international markets and military spending. Also, a late lunar new year has thrown off factory shipments from Asia, and the delayed release of the Samsung (005930.Korea) Galaxy S4 smartphone further disrupted shipping dates.

The Bottom Line

Supercheap Atlas Air shares could soar nearly 50%, to $60, as profits rise and its price/earnings multiple moves back toward historical levels.

As a result, Atlas stock is "incredibly cheap," says Kevin Sterling, an analyst at Richmond, Va.–based BB&T Capital Markets, noting that it fetches just 85% of its $48.57 book value. Sterling sees the shares hitting $60, based on its multiple expanding to a still-below-average 11.4 times his 2014 estimate of $5.25 a share, as business conditions improve. He expects as much as $9 a share this year in free cash flow.

Clyde McGregor, manager of the
Oakmark Equity and Income
fund (OAKBX), with about $19 billion under management, took a position in Atlas Air in the first quarter. He's impressed with the competitive advantage the new fleet provides, but adds that increasing international trade would be most beneficial to Atlas.